Guest Post: If You Prop Up An Artificial Economy Long Enough, Does It Become Real?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

If You Prop Up An Artificial Economy Long Enough, Does It Become Real?

Does carefully nurturing a facade of health actually lead to health? No; all it does is perpetuate a destructive illusion.

The policy of the Status Quo since 2008 boils down to this assumption: if we prop up an artificial economy long enough, it will magically become real. This is an extraordinary assumption: that the process of artifice will result in artifice becoming real.

This is the equivalent of a dysfunctional family presenting an artificial facade of happiness to the external world and expecting that fraud to conjure up real happiness. We all know it doesn't work that way; rather, the dysfunctional family that expends its resources supporting a phony facade is living a lie that only increases its instability.

The U.S. economy is artificial in three important ways:

1. The Federal Reserve has distorted the market for borrowing capital by reducing interest rates to zero. Those holding capital (savings) receive essentially zero interest income while favored borrowers (banks and large corporations) can pursue marginal-return speculations for free (when measured in real terms), creating systemic moral hazard of the most pernicious sort.

2. The Federal Reserve's monetizing of Federal borrowing via the purchase of Treasury bonds has given the government a "free" hand to spend $1.3 trillion more than it collects in tax revenues, feeding inflation (The Source of High Inflation: Government Spending) and the moral hazard created by having essentially free money to dispense to cronies and to buy voter complicity.

In a real market economy, the cost of Federal borrowing would rise as bondholders would demand a premium for taking on the risk that interest rates would eventually rise under the relentless accumulation of stupendous debt. That mechanism has been frozen by the Fed's monetiziation of Federal borrowing.

3. The housing market has essentially been socialized, with the taxpayers now funding the entire mortgage market (98% of mortgages are backed by Federal agencies) and endless subsidies of marginal buyers (3% down payment loans, etc.) The Federal Reserve has committed itself to taking trillions of dollars of impaired or dodgy mortgages off the balance sheets of banks and burying them in its own opaque balance sheet, while also maintaining near-zero interest rates (when adjusted for inflation) to incentivize refinancing and home buying--both of which generate billions of dollars in fat fees for banks.

All this artifice has created an artificial economy on multiple levels. The entire bond market is artificial, the entire stock market is artificial, and the entire housing market is artificial.

One of the more striking quotes I've read recently was buried in a report chronicling the effects of the housing bust on Nevada. The quote was by a woman who had stopped paying her mortgage three years ago and had been living rent/mortgage-free in the house courtesy of the bank, which had declined to even begin the foreclosure process.

Harris, 38, stopped paying her mortgage three years ago after her accounting business lost its biggest client and her home’s value plummeted 52 percent. Some neighbors are also delinquent on their mortgages. “There are so many people like me who aren’t paying their mortgage so they can buy groceries and gas,” said Harris, who was rejected for loan modification programs. “It’s creating this whole false economy.”

This is an astonishing statement on several levels. That people can only afford to keep afloat if their housing is free reflects an extreme of financial fragility. That the banks are willing to pay property taxes and receive zero income for 3+ years reflects the banks' dedication to restricting the inventory of unsold homes so prices will be forced higher as supply drops below demand.

This strategy, no doubt orchestrated with quasi-official approval, has already paid handsome dividends, as beaten-down markets such as Phoenix have seen sharp increases in home values this year as the number of foreclosed homes entering the market has dwindled. This artificial restriction of inventory by lenders has been well-documented; not only are there millions of homes in the foreclosure pipeline that are not being moved onto the marketplace, there are at least (by some estimates) another 4 million in-default homes that are being held out of the pipeline entirely; this is the "shadow inventory," the inventory that is not even recognized as being in default despite 3+ years of non-payment.

This is a risky game the banks are playing, as this visibly artificial restriction of inventory undermines the belief that this recent surge in home valuations is legitimate, i.e. a balancing of actual supply and demand. Sqeezing inventory does not magically enlarge the pool of qualified home buyers; it "games the system" so those buyers are paying more for the homes that they would otherwise be worth if the market weren't being manipulated. This helps banks by raising the prices they're getting for the few foreclosed properties that reach the market, but it certainly doesn't help buyers.

This strategy is betting that the gains reaped by selling REOs ("real estate owned," i.e. houses the banks own) at higher prices more than offset the losses generated by paying the costs of non-performing loans--property taxes, for example--and the decline in income as homeowners stop making mortage payments.

The real estate industry and the banks are hoping that the increase in housing prices caused by the restriction of inventory will spark a new rush into real estate as people start believing "the bottom is in." But this is based on the expectation that there is pool of potential buyers who are only waiting for the bottom to be identified to jump in and buy a house.

The irony is that restricting inventory keeps prices high, limiting the number of people who qualify for large mortages. Given that incomes of the lower 95% of households have been declining for four years, the foundation of borrowing is crumbling. The Fed has attempted to increase leverage by lowering mortgage rates to 3.5%, barely above official inflation, while relieving banks of impaired mortgages by buying $1 trillion of mortgage-backed securities in 2009-10 and now another $500 billion over the next year.

The idea here is that maintaining an artificial market and reality will somehow magically transform a broken system into a self-healing one. Stated in this transparent fashion, the absurdity of the Status Quo's primary policy is clearly revealed.

Dysfunctional families, enterprises, markets and governing Elites all share this same dilemma: you cannot fix an unhealthy, dysfunctional system by hiding reality behind an artificial reality facade. All you're doing is increasing the instability of the system, which is not allowed to self-correct.

The U.S. economy is riddled with artifice: millions of people who recently generated income from their labor have gamed the system and are now "disabled for life." Millions more are living in a bank-enabled fantasy of free housing. Millions more are living off borrowed money: student loans, money the government has borrowed and dispensed as transfer payments, etc. Assets are artificially propped up lest a banking sector with insufficient collateral be revealed as structurally insolvent.

One definition of dysfunction is an internal conflict that cannot be resolved. That is our Status Quo: its strategy to fix its dysfunction and instability is to create an artificial economy based on smoke-and-mirrors data, ginned up balance sheets and a facade of "normalcy" that is anything but normal or healthy. How can such an artificial economy become healthy when its self-correcting features and transparency have both been overriden by artifice?

It's not difficult to predict an eventual spike of instability in such a system; the only difficulty is predicting the date of the instability. Hiding a broken, dysfunctional economy behind a facade of artifice and illusion can't fix what's broken, it only adds to the system's systemic instability as resources that could have gone to actually fix things are squandered on propping up phony facades of "growth" and "health."

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knukles's picture

Only if you're delusional.



(ask the USSR)

Lohn Jocke's picture

Nah, every once in a while you need a good ol' war to keep the dream alive.

LiesAreTheOnlyTruth's picture

Or nine years of war ... should do the trick!  Forward!

Silver Bug's picture

Its real until people realize it's not. Then it all just blows up in a grand epic fashion. That time is coming soon.

ACP's picture

It absolutely becomes real, usually in the form of 100 S&P handles, all in one day.

Henry Chinaski's picture

Sticking with the analogy, plenty of happy, well-adjusted people have come from disfunctional families and plenty of people prosper in the artificial economy.  Both the illusion and the reality are true; disregeard either at your peril.

fresno dan's picture

you say that as if it were a bad thing.

For example, I bought myself a rubber inflatable woman.  At first it was hard, but I let some of the air out.  But after I got to know her, our relationship blossumed.  Sure, there have been blow ups, but we like the same things, and except for the unfortunate helium experimentation, which we agreed never to speak of again, our time together has been slippery and fun. 

Yes dear.... Well, rubbernina is calling, so I have to go - but remember that delusion is what made this country.  And DuPont is what made rubbernina.   And silicone skin encasing silicone breasts is what is coming.  With inflated dollars, every man will be able to have an inflated is grand. 

LULZBank's picture

You make mone when its growing and you move it offshore before the war and then you come back in... repeat.

Economics is you produce, you consume and you trade the surplus. Anything more than that is artificial and a pyramid scheme.

CrashisOptimistic's picture

Let's take a step back here and I will explain what's going on.

First of all, "artificial" is a word with a very specific meaning.  Money is artificial.  Gold's value is artificial.  Economics is artificial.  Anything man-made, by definition, is artificial.

What is not artificial is work, and "work" has a meaning too, from physics.  Energy has a meaning from physics, but it's best not to think about energy, because then you confuse electricity as significant when most of it comes from coal, that is transported to the powerplant via rail or truck, both of which run on oil.

What is happening is the energy to extract energy from the ground is rising sharply.  "All the easy oil is gone" is literally killing civilization.  It requires more and more BTUs every single day to get BTUs out of the ground, and that ratio devastation is why the world is falling apart.

So sort of ignore central banks and gold and money and inflation and all else because they don't matter.  Only the energy ratio matters.  Everything else is artificial units applied to that which predates mankind by 80 million years.

LULZBank's picture

+1 Agreed.

Though, human civilisation existed before crude Oil and will also exist after.

Just that bankers will have to find something else to build their pyramid schemes on, unless we build a pyramid on them before.

CrashisOptimistic's picture

You are correct, sir.

Civilization existed pre oil and it will exist post oil, at roughly the same size it was pre oil.

That is, 1 billion people.  Versus 7 billion today.

Urban Redneck's picture

What a depressing thought, the bankers outliving the oilmen...  

The banking system will at some point collapse upon its structurally unsound fiat foundation, but in the interim it is the oilmen who have the power to do what the politicians won't, and the people can't.

Antifaschistische's picture

...great point, add to this the amount of "work" that productive people have to do to support an ever swelling world community of parasites. This is worsening daily also.

Radical Marijuana's picture

Hah! CrashisOptimistic, allow me to take a few more steps back, and "explain what is going on" ...

Oil and coal are the salient symbols of the progress of technology, due to advances in basic science, delivering control over inanimate energy sources to the human mind, that can model the world, and apply those models successfully.

Although I agree that those fuels were more concentrated and high grade than anything else, they are NOT necessary. What is necessary is the mental models to understand the world, enough to use inanimate energy sources. Of those, there is still a staggering abundance!



Our political problems are due to the ways that energy directs itself, which then most acutely raises the issues of self-reference, which are absolutely vital to the political problems found in our combined money/murder systems! The most extreme manifestation of that problem is within militarism, where those who were the most successful at deceits won the wars. That created an infinite tunnel of deceits, which evolved to become our current regime of the Fraud Kings, the central banksters, controlling our civilization, through the application of the methods of organized crime, which is inherently self-referential too, only WAY MORE SO, and WAY MORE IMPORTANTLY SO!!!

What has changed human history is the progress in science, building better models of the world, that enabled technologies to harness previously inanimate energy sources! That astronomically sized amplification was pumped into a social pyramid system, especially the social pyramid (Ponzi Scheme) money/murder methodologies.

That social pyramid system is run by people who specialize in being professional liars and immaculate hypocrites.  Their abilities to apply false fundamental dichotomies through blatant double standards is awesome!

Anyway, the point is that there will always be a relative abundance of inanimate energy sources. However, it is impossible for any such environmental abundance to keep up with endless exponential growth. Human ecology and industrial ecology, like the natural ecologies did before them, MUST develop dynamic equilibria!

That means our money/murder systems must go through their processes, to equilibrate, dynamically, over time, within an infinitely bigger environement, that will always be out of control. As long as our environment stays relatively constant, then we will eventually be forced, through oscillations back and forth, to converge on some dynamic equilibria ...

My point is that the ABSOLUTELY CRUCIAL CORE to all of the possible alternative technologies is the death control system, which is the keystone to any system of alternatives. Alternative technologies means alternative life styles. Alternative life styles means alternative systems of death control.

All of those assertions are by definition. "Artificial" is a word that most applies to the context of natural selection, when human beings evolve "artificial selection."

That artificial selection occurs when people become sufficiently aware of their interdependence, and that they were participating in natural selection already. When human beings advance their understanding of energy systems, then, eventually, they find and fall through the tunnels of infinite self-reference, and the most important of those are the infinite tunnels of deceits through their money and murder systems!

Conman's picture

It will become real if the Fed can get things to bubble again. Tech bubble 2.0, housing bubble 2.0, car loan bubble 1.0, student loan buble 1.0, take your pick which bubble will pop first. I say tech bubble 2.0 - i mean really theres gotta be more clel phones on the planet than people at this point.

TruthHunter's picture

There's food and shelter, the rest is entertainment.

Kitler's picture

I like your clothing optional approach. Very entertaining.

TruthHunter's picture

Clothing is either shelter of entertainment


pods's picture

Just create your own reality.


Me:  Did you see that hairball the cat coughed up behind the chair?

Wife: No.

Me:  Neither did I.


Desert Irish's picture

Welcome to the Matrix...

vinayjha's picture

Adding too much pesticides (free money) to plant (economy) will only harm it. Now its all pesticides, and plant is dead.

Kitler's picture

Just add green paint to the pesticide, spray the dead plant and you are good to go.

That should just about win me a Nobel prize in economics these days.

firstdivision's picture

I keep pretending I have a 10 inch penis, and it still hasn't hit 10 inches.  Maybe I need to pretend harder?

Kitler's picture

It's simpler just to date midgets.

LiesAreTheOnlyTruth's picture

LMAO ... yeah, and cheaper too!  Less food, clothing ... smaller car, less gas ... winning! 

"Fight inflation, marry a midget!"

GoldenTool's picture

Just keep telling her it is ten inches and make sure she(?) doesn't have any real goods to compare it to.


operari sequitur esse

LiesAreTheOnlyTruth's picture

No Golden ... you just be sure to be the ONLY source for rulers/measuring.

Then, you just decree that an inch is actually two ... winning!

That's what they do with CPI/GDP/blah blah measuring devices :)

GoldenTool's picture

Her perception is reality, so your saying I shouldn't be verbally naked shorting everyone else's schlong?  


operari sequitur esse

LawsofPhysics's picture

Depends whether or not your fake "market" drops when things go bidless I guess.

If there are no real buyers, I don't think it matters.

Only once contracts to to deliver real commodities start to default do things get real.

That reminds me, any forex or commodity traders who had accounts with PFG online?

How are you doing?

Landotfree's picture

The world has been living under the system for 1000s of years.   The fiction is that the system can exponential expand forever, without this lie the system does not work.   Eventually basic Math catches up to the world and the system collapses.   The unfunded liabilities will have to be wiped from the books, this time it will be a 30-70 year process where as last time it was 20-25 year process.  1-3 unfunded liabilities need to go.  

LawsofPhysics's picture

Yes.  now please define "unfunded liability" in detail.

RSBriggs's picture

I'm guessing he means Social Security payouts to those that have been forced to pay into the system for 40+ years.

LawsofPhysics's picture

A rhetorical question, but yes.  Always wondered how something my employees and I have to pay for became an "entitlement" or "unfunded".

Where the fuck did the money go?  This is the only thing the old fucks should be demanding right now.

sdmjake's picture

Last time I checked, it looked like all the 'excess SS $' was taken out [of the 'lock box'] and used to 'balance the budget' in the late 90's.


Dr. Engali's picture

I hate locked boxes. IMHO all boxes should be open an free to be probed.

insanelysane's picture

Exactly.  The old fucks that are complaining allowed their goverment to spend the money on them in the 90s and now they want it again.  Double dipping boomer bastards!

RSBriggs's picture

"Allowed their government to spend the money".  Right..  Just about as much as you are allowing the FED to print money, and allowing the government to spend trillions it doesn't have today to bury your children's children in debt..  Maybe you'd just better head up to Washington, DC and tell them to stop it.  I'm certain they'll listen to you...

Landotfree's picture

"Where the fuck did the money go?  This is the only thing the old fucks should be demanding right now."

What money?  Money stopped being used on a large scale long ago, due to unable to expand exponentially.  The Romans were unable to exponential growth the silver supply, Rome went from a few million to less than 50,000 population.  

"old fucks" have nothing to demand, sorry, the system only survives by the credit system expanding at an exponential rate... the "old fucks" are part of the problem, they want a return on their investments... ie interest... ie ponzi scheme.

RSBriggs's picture

I'd be perfectly happy to get just back what I've paid in for the last 44 years, without interest.  So you think that expecting a return on investment, or labor, or capital or time is a "problem"?   How so?  Maybe you consider your time and resources worth zero, but mine aren't. 

LawsofPhysics's picture

""old fucks" have nothing to demand,"- 


Riiiiiggggghhhhht, aside from inexpensive (but "the best") health care, cheap gas, cheap food, cheap entertainment...


Don't have many older relatives do ya?

Here let me fix it for you;  "There are a few very successful families that came before you and yours, they want their fucking rent (money for nothing) now pay the fuck up." - perhaps that is what you meant to say.

RSBriggs's picture

By "nothing to demand" he means "no right to demand". 

And as far as health care, cheap gas, cheap food, cheap entertainment - these are demands unique to people that have worked all their lives, because why exactly???

LawsofPhysics's picture

language matters...

Tell me good sir, what sort of response might be ellicited should I approach you and say; "I'd like to take a moment to tell you about a great cause I will be asking you to support" as opposed to "I'd like to take a moment to tell you about a great cause I will be forcing you to support."


for one thing, if you don't work, you shouldn't be allowed to eat.

RSBriggs's picture

I'd certainly agree that if you chose not to work, it shouldn't be my responsibility to feed you, nor pay you an extra $650 per month every time you breed, nor buy you an "Obamaphone". 

By the same token, I would say that, having been forced to pay in nearly $380,000 into a Federal "retirement/insurance" account over the last 44 years, it's not an "entitlement" to expect payout from the same. 

odatruf's picture

The use of the word entitlement regarding Social Security and Medicare, et al has been so badly perverted that it ought to stop being used by those who understand it.  The "entitlement" aspect to it has to do with the federal budget / appropriations process and has zero to do with the 47%, freeloading, having earned it or anything else related to the people who get the benefits.

The thing that is entitled, is the program, not the end users.  The programs are entitled to be funded without any need of Congressional action.  In fact, they will run on auto pilot as they are now until an amendment is made to the authorizing law or the federal government runs out of money.  And even that second part is open to debate.


blunderdog's picture

This would all just be rhetoric, right?  Or are you really this clueless?

That money you paid for so many years was spent to do all the shit government DOES.  It was spent buying missiles, paying salaries, bailing out failing businesses, cutting checks to old folks, paying interest on bonds, bombing countries all over the world, whatever.  You know, big gummit.

"Unfunded" in this context means that there is no "predefined" pool of money from which future benefits will be paid.  The money to pay future benefits will have to be collected and transferred, just like any other wealth-redistribution scheme.

Social Security/Medicare are PARTIALLY funded--that is why we pay FICA. FICA was CREATED specifically for the purpose of providing the revenue stream to pay for the original defined benefits.

But the Medicare-D expansion (just for example) didn't require a FICA rate increase to provide for the future costs.  So that particular benefit is "unfunded."  At the time they passed that legislation, Congress COULD HAVE increased FICA taxes, or uncapped the max contribution, or reduced other Medicare benefits to pay for the drugs, but they didn't do so.

Does that clarify it for you?

Spastica Rex's picture

Every petroleum consuming system on the face of the Earth.

LiesAreTheOnlyTruth's picture

The math is just too complicated Laws, so just trust us, it's fine.

Landotfree's picture

There is nothing complex about it... you are a part of a global ponzi system which was just like the one before.   There is nothing complex about interest, only hairless monkeys inability to understand the end result of the use of the equation.

Landotfree's picture

"Yes.  now please define "unfunded liability" in detail."

All the hairless monkeys walking around, they certainly are not funded once the global credit system collapses.   

Dr. Engali's picture

If we close our collective eyes long enough all this bad stuff will go away.